Vesting and plan merger

I am revising my question. I have Plan A merging into Plan B 12/31/23. Plan A has 4 year graded vesting - less than 2 years 0%, 2 years - 30%, 3 years - 60%, 4 years - 100%. Plan A will merge into successor plan B which has 5 year graded vesting - less than 1 year 0%, 1 year - 20%, 2 years - 40%, 3 years - 60%, 4 years - 80%, 5 years - 100%. For contributions accrued as of 12/31/23, I have to give participants with 3 or more years of service the right to elect to remain on the old schedule correct? What about participants with less than 3 years - can the old schedule continue to apply to accrued benefits even though the new schedule is better at year 1 and year 2? I am looking at the IRS example where they recommend a graded 3 year schedule even for a 0% vested participant in the accrued benefit. Please let me know your thoughts!

Change in Plan Vesting Schedules | Internal Revenue Service (irs.gov)

Some missing info.  Is there also an associated change in corporate structure?  For example, did Company B acquire Company A?  If so, how long ago did that occur?  

They are tax exempt entities, so the acquisition is like a stock purchase, where you have 80% or more Board control. They were acquired I think earlier this year, so they have the transition period for coverage testing. Just want to make sure on the new vesting I am ok to use 5 year graded for new monies for the group with less than 3 years of service.

You can always be more generous than the law requires, if the plan document is amended to so provide. Otherwise, for participants with less than 3 years of service as of the date of plan merger, those participants have to be given a vesting percentage no less than their existing vested percentage as of the date of the merger. Thereafter, they could be subjected to the surviving plan's vesting schedule even if the predecessor plan's schedule was more generous at a later point. As applied to participants with 2 years of service under Plan A, such participants have to be at least 30% vested. After 3 years of services, and so on, their vested percentage would be determined applying the provisions of Plan B's vesting  schedule, unless the plan is otherwise amended to either continue the Plan A schedule to their Plan A accounts or their vested percentage is otherwise increased under Plan B.

Thank you! Could the plan state that the 4 year vesting schedule in Plan A will continue to apply in Plan B for old monies and new monies after the merger? I do not see a cutback in vesting. The other participants in Plan B after the merger will remain on their 5 year graded schedule. I admit there are recordkeeping challenges as with transfers and rehires.

it's actually more complex than that.  There was a court case (Heinz) that led to different regulations about 10 years ago.  If you want, give me a call after TG, but the sum is:  (a) for purposes of money in existence at the merger, the right to the old vesting schedule on that money must be protected.  (b) for new money after the merger, if a participant has at least 3 years of service, he/she gets to choose the schedule he/she wants and a participant with fewer than 3 years of service must be vested at least as much as he/she is at the date of change, but may have to wait for the new schedule to exceed that vested balance to get additional vesting.  Check out the case 32 EBC 2313 (Supreme Court 2004) and also Treas. Rg. 1.411(d)-3(a).

Hi Ilene,

I am totally aware of the anti-cutback rules, yes they are complex!!  With this post I was wanting to clarify what option I had with those under 3 years of service, since I want to know every nuance.  I think I am good there. We have presented the options of the best of both worlds to the client - 2 blended vesting schedules to elect one for the entire plan population post-merger, and they have declined because they want to keep surviving plan at the 5 year graded schedule. So for this merging plan, they want to keep those employees at the 4 year graded for old and new monies. Actually we will grandfather existing accounts as of the merger and new hires will be on the 5 year schedule for entire plan population I do not see an anti-cutback issue here. I will check into the 401(a)(4) implications if any but I think ok in this merger situation.

Thank you!

Relius Vesting and cut back article.pdf Change in Plan Vesting Schedules _ Internal Revenue Service.pdf

You can have different compliant vesting schedules for different groups of participants in the same plan, in parallel, indefinitely. It's just that if you WANT to modify an existing vesting schedule (e.g., have everyone on the same schedule as soon as possible after the merger), then you need to grandfather no less than the existing vested percentage for money already allocated to participants' accounts, and give anyone with 3 or more years of services a choice of old or knew for going forward.

Thank you Luke!